Indonesia Energy, Utilities & Mining NewsFlash/ July 2017/ No.

62
The new GR 79 major changes to the key PSC cost recovery and tax
regulation

PwC Indonesia
Energy, Utilities & Mining NewsFlash

The new GR 79 major changes to the

key PSC cost recovery and tax regulation
New Government regulation makes significant changes to GR 79 and the
fiscal arrangements for PSC activities.
On 19 June 2017, and so just before the Idul Fitri break, the President signed GR 27/2017 to amend
the industry-critical GR 79/2010. Readers will recall that GR 79 represents the principal regulation
governing the cost recovery and Income Tax arrangements relevant to the upstream oil and gas
sector. This includes the founding framework for taxing transfers of PSC interests which was later
expanded with Minister of Finance (MoF) Regulation No. 257 of 28 December 2011 (PMK 257).

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1 Indonesia Energy, Utilities and Mining NewsFlash

 Whats new?
Whilst we are still analysing the full impact of the amendments the main changes can be summarised as
follows:-

a) Article 10 in regard to State Revenue including Government Share and FTP

This Article has been amended to allow for a range of upstream incentives including:-
i. a Domestic Market Obligation (DMO) holiday (albeit with no time limit specified);
ii. a range of tax incentives where they are in accordance with the prevailing tax laws; and
iii. a range of non-tax State revenue incentives which may include the use of State owned assets for
upstream activities.
The elucidation indicates that this amendment primarily targets the historical PSC-embedded
incentives such as investment credits and DMO holidays. It is not clear however whether this will
extend to general tax concessions such as those under GR 9/2016. Whilst this amendment appears
positive in principle, the true value will not be clear until implementation.
These amendments also include a new Article 10(a) to allow for a sliding scale equity split to be
determined by the Minister of Energy and Mineral Resources (MoEMR). It is unclear at this stage
how this scale will interface with the splits shown in the PSCs themselves (although see discussion
on Article 38 below);

b) Article 11 in regard to recoverable

costs
This Article has been amended to positively
confirm the recoverability of LNG
processing costs;

c) Article 13 in regard to non-

recoverable costs
This Article has been amended to remove a
number of items from the list of non-cost
recoverable spending being:-
i. tax allowances related to employee
Income Tax (which appears to be
employee Income Tax where remitted
on a grossed up basis);
ii. interest formally approved for cost
recovery; and
iii. community development during an
exploitation phase.

As a result spending on these items should

now be cost recoverable at least to the
extent that this is in accordance with the
requirements of the relevant PSC;

d) Article 16 in regard to depreciation

This Article has been amended to allow for
the residual value of assets that are no
longer able to be used to be cost recovered
outright. Under the previous arrangements,
and Exhibit C of most PSCs, this spending
was to continue to be depreciable based
upon the original useful life of the asset;

2 Indonesia Energy, Utilities and Mining NewsFlash

e) Article 25 dealing with the Income Tax calculation
This Article has been amended to include:-
i. a new Article 25(7a) which requires that Assessments arising out of a tax audit are to be issued
within 12 months from the receipt of a complete tax return (previously there was no formal
timeline except in a tax refund case).
The intent/impact is not clear particularly noting the current joint-audit framework with the
BPKP and SKK Migas. It is possible however that this amendment will mean less of a role for the
Directorate General of Tax (DGT) in Income Tax related audits;
ii. new Articles 25(12) and (13) which provide that Income Tax on First Tranche Petroleum (FTP)
is to be due when accumulated FTP exceeds the relevant cost recovery balance.
This amendment is not entirely clear but could mean that FTP is to be accumulated as non-taxable
income until reaching exhaustion of unrecovered costs (and so an equity oil position) at which
point the entire accumulated FTP becomes taxable.
If so this treatment would be consistent with the treatment for FTP as outlined under DGT
Regulation No. 5/2014 which required Income Tax on FTP to be remitted once an equity split is
reached;

f) Article 26 dealing with Tax Facilities

This Article has been amended to include new Articles 26(A) to (E) to provide specific tax facilities as
follows:-
i. a duty/import tax exemption in relation to physical imports by PSCs during both the exploration
and exploitation phases;
ii. reductions in Land and Building Tax (PBB) of 100% (during exploration phase) and up to 100%
(during exploitation phase).
Note that MoF approval is required for these import related and PBB incentives during
exploitation (the incentives during exploration phase appear to be automatic);
iii. that income arising out of charges from the shared use of assets by PSCs is to be exempt from
withholding tax (WHT) and Value-added Tax (VAT).
Interestingly the amendment does not formally provide that the income itself is otherwise
exempt;
iv. that indirect head office allocations do not constitute Income Tax objects or VATable
supplies. This appears to be a formalisation of the long established principle set out under MoF
letter S-604 issued in 1998 which has been challenged by the DGT in recent years.
The consequence of this amendment is presumably to render cost allocations exempt from WHT
and VAT. There is however no elaboration on the meaning of a head office and so it is unclear
how widely this incentive can be extended to affiliate charges from overseas;

3 Indonesia Energy, Utilities and Mining NewsFlash

 g) Article 27 dealing with Uplifts and PI transfers
This Article has been amended to include:-
i. a new Article 27(1a) which provides that taxable income arising from uplifts, after being
reduced by Final Income Tax, is to be non-taxable; and
ii. a new Article 27(2a) which provides that taxable income arising from PSC transfers, after being
reduced by Final Income Tax, is to be non-taxable.
In these cases the consequence of the after tax income becoming non-taxable is presumably
that no further tax should apply to the after tax income. This should therefore now formally
exclude the levying of a branch profits tax (BPT) on the after tax income from PSC transfers
presumably in either a direct or indirect transfer scenario. Readers should note however that
this outcome is not actually stated.
On this point, readers should also note that the BPT on PSC transfers was introduced via PMK
257 and so was arguably never part of the original GR 79 architecture. It is not clear whether a
complementary amendment of PMK 257 will now be issued to ensure complete clarity on this
matter;

h) Article 31(2) dealing with PSC Transfer Reporting

This Article has been amended to require that the value of a PSC transfer be reported to both the
Directorate General of Oil and Gas (DGOG) of the MoEMR and the DGT.
Previously the GR 79 reporting was only to the DGT;

i) Article 37 dealing with pre-GR 79 PSCs

This Article has been amended to include a new Article 37(A).
The amendment reinforces the requirement for pre-GR 79 PSCs to follow the GR 79 interpretation
of 8 unclear matters set out at Article 38 of GR 79 (i.e. the matters on which GR 79 has,
controversially, sought to apply itself to the exclusion of the underlying PSC). This amendment
therefore appears designed to allow these unclear matters to continue to be governed by regulation
rather than traditional PSC interpretations;

4 Indonesia Energy, Utilities and Mining NewsFlash

j) Article 38 dealing with Transitional Provisions
This Article has been amended to include new Articles 38(A)-(C) which set out transitional
provisions as follows:-

i. for PSCs signed before Law No. 22/2001:-

the relevant PSC holders should elect to
either:-
A-(exclusively) follow the provisions of the
relevant PSC (and so disregard GR 27); or
B-adjust their PSCs so as to comply with
GR 27 (in its entirety).
The election, which appears to be
mandatory, therefore requires the PSC
holder to take an all or nothing approach
to the adoption of GR 27 (including
therefore the residual components of GR
79).
This election is to be made within 6 months
of the issuance of GR 27 (i.e. by mid
December 2017);
ii. for PSCs signed before GR 79 (but post Law
No. 22/2001):- the outcome here appears
to be identical to category i. above (i.e. for
PSCs signed pre-Law No. 22/2001);
iii. for PSCs signed after GR 79 (but prior to 19
June 2017):- the outcome here appears to
be similar to category i. PSCs above
although presumably with any election to
opt-out of GR 27 still leaving the PSC
holder subject to GR 79;
iv. for PSCs signed post 19 June 2017:- the
outcome here appears to simply require the
PSC holder to follow GR 27.
The impact of these transitional rules,
including on the underlying PSC itself, will
require some consideration (noting that an
election of this nature was not a feature of
the introduction to GR 79). In the most
benign scenario opting-in would appear
to mean that a pre-GR 79 PSC holder would
follow the underlying PSC arrangements
(other than in respect of the 8 unclear
matters) while accessing the new
concessions specific to GR 27. A question
does however arise as to how vulnerable
that scenario would leave the PSC holder to
future amendments to GR 27.
Alternatively if a pre-GR 79 PSC holder
were to opt-out the framework might still
be the underlying PSC position as modified
by GR 79.

5 Indonesia Energy, Utilities and Mining NewsFlash

 Food for thought
In conclusion, the package of amendments may, on balance, be viewed positively by the industry and
particularly for newer PSCs. However, all PSC holders will need to carefully weigh-up the economic
implications of the different options before making an election to opt-in to GR 27.
One key concern for older generation PSCs is whether the long-held concept of an assume and discharge
by the Government for all taxes not stated in the PSC continues to be available under the new GR 27. It
could be that, under GR 27, only the specific exemptions or tax facilities provided for in the GR are
available which would then be subject to ongoing uncertainty from changes in regulations in the future.
Conversely, if PSC holders choose not to opt-in they may not be able to access the new positive elements
of GR 79 or GR 27, and may nevertheless continue to be subject to the interpretational vagaries of their
PSC by the tax and other authorities.
From a purely fiscal perspective the apparent clarity around the non-imposition of BPT on PSC transfers
will no doubt be welcome and potentially add significant book value to producing PSCs in particular.
Other fiscal interventions, including those in relation to head office costs, should also be helpful.
However, to avoid uncertainty, several MoF regulations/DGT decrees will need to be amended to be in
line with these new terms.
Implementation will therefore be key with the major area of consideration being the impact of the all or
nothing nature of the GR 27 adoption election. With this in mind one immediate recommendation
would be for all PSC holders to review the package of amendments in their entirety with a view to coming
to an early view on how to approach a December 2017 election.

6 Indonesia Energy, Utilities and Mining NewsFlash

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